The IRC 414 controlled group rules require you to treat legally separate businesses as a single employer when the same people own enough of each of them. Once that happens, every employee across every entity gets pooled together for retirement plan coverage testing, contribution limits, nondiscrimination testing, and several other federal benefit requirements. The rule exists so an owner can’t split one operation into multiple entities and load the benefits onto the entity that happens to employ the executives.
If you hold interests in more than one business, this framework almost certainly affects how your plans have to be designed and tested, and the price of getting it wrong runs from corrective contributions on the low end to plan disqualification on the high end.
When Multiple Businesses Count as One Employer
IRC Section 414(b) applies the aggregation rule to corporations in a controlled group; Section 414(c) applies the same treatment to partnerships, sole proprietorships, and other unincorporated businesses under common control.{1Office of the Law Revision Counsel. 26 U.S. Code 414 – Definitions and Special Rules Section 1563(a) then defines three structural relationships that trigger controlled group status.{2Office of the Law Revision Counsel. 26 U.S. Code 1563 – Definitions and Special Rules The tests are mechanical. If the ownership numbers are met, aggregation is automatic no matter how operationally independent the businesses look.
Parent-Subsidiary
A parent-subsidiary group is a chain connected through stock ownership. The parent owns at least 80% of the voting power or total value of at least one subsidiary, and 80% or more of every other entity in the chain is owned by one or more entities already in the group. If Company A owns 90% of Company B and Company B owns 85% of Company C, all three form a single parent-subsidiary controlled group.
Brother-Sister
A brother-sister group involves two or more entities owned sideways by the same small group of people. For Section 414 purposes, the test in Section 1563(f)(5) applies, and five or fewer common owners who are individuals, estates, or trusts must satisfy both parts:
- An 80% controlling interest test: the same five or fewer owners collectively hold at least 80% of the voting power or total value of each entity.
- A more-than-50% identical ownership test: the same owners collectively hold more than 50% of each entity, counting only each owner’s lowest percentage across all the entities.
The identical ownership test is where the real analysis happens. Owner A holds 60% of Corporation X and 40% of Corporation Y; A’s identical ownership is 40%, the smaller figure. Owner B holds 30% of X and 50% of Y; B’s identical ownership is 30%. Their combined identical ownership is 70%, above the 50% threshold. If they also collectively clear 80% of each corporation, a brother-sister group exists.
Combined Group
A combined group exists when three or more entities are linked through both a parent-subsidiary and a brother-sister relationship, with the common parent of the subsidiary chain also a member of the brother-sister group. Every entity in either relationship joins one combined controlled group.
Affiliated Service Groups
Even when the ownership numbers don’t hit the thresholds, IRC Section 414(m) can still force aggregation through the affiliated service group rules. These target professional service arrangements: a medical practice paired with a separate billing company, a law firm using a related management entity, and similar setups.{1Office of the Law Revision Counsel. 26 U.S. Code 414 – Definitions and Special Rules The analysis starts with a “first service organization” (FSO), an entity whose principal business is performing services, and pulls in two types of related entities:
- A-Organizations: any service organization that is a shareholder or partner in the FSO and either regularly performs services for it or regularly teams up with it to serve third-party clients.
- B-Organizations: any other organization where a significant portion of its business involves performing services historically done by employees in that field, and at least 10% of its interests are held by highly compensated employees of the FSO or an A-Organization.
Section 414(m)(5) adds a separate category for management-function organizations whose principal business is performing management functions on a regular and continuing basis for another organization. A dermatology practice owned by three doctors might not share 80% ownership with the separate medical spa they set up, but if the spa regularly serves the practice and the doctors hold interests in both, an affiliated service group likely exists.
The Ownership You Didn’t Know You Had
Controlled group analysis would be simple if it only counted shares you directly hold. It doesn’t. Section 1563(e) attributes stock to you that you don’t technically own, based on family relationships and entity relationships.{2Office of the Law Revision Counsel. 26 U.S. Code 1563 – Definitions and Special Rules Parallel rules for unincorporated businesses appear in Treasury Regulation 1.414(c)-4.{3eCFR. 26 CFR 1.414(c)-4 – Rules for Determining Ownership
Spouses
You are generally treated as owning the stock your spouse owns. A husband who owns 100% of one company and a wife who owns 100% of another are treated as a brother-sister controlled group, because each is deemed to hold the other’s shares. An exception applies only if all four of the following are true for the entity during the taxable year: the individual holds no direct stock in the spouse’s corporation, is not a director or employee and does not participate in management, no more than 50% of the corporation’s gross income comes from passive sources like rents and dividends, and the stock is not subject to restrictions favoring the individual or their minor children. Miss any one condition and the full attribution applies.
Children, Parents, and Grandparents
Stock owned by a child under 21 is automatically attributed to both parents, and stock owned by a parent is attributed to a child under 21. For adult children (21 and older), grandchildren, grandparents, and parents, attribution kicks in only if the individual already owns more than 50% of the entity’s voting power or value; once they clear that threshold, they are also treated as owning the stock held by those family members. Stock attributed from one family member to you cannot then be re-attributed from you to a different family member.
Options
An option, warrant, convertible note, or any other right to acquire stock is treated as if you already own the underlying stock. This alone can push an owner over the 80% or 50% threshold before the option is ever exercised.
Partnerships, Estates, Trusts, and Corporations
Business interests held by a partnership are attributed proportionally to any partner who owns 5% or more of the partnership’s capital or profits.{3eCFR. 26 CFR 1.414(c)-4 – Rules for Determining Ownership The same 5% threshold applies to estates and trusts: a beneficiary with at least a 5% actuarial interest is treated as owning a proportional share of the entity’s holdings. Under Section 1563(e)(4), stock owned by a corporation is attributed proportionally to any shareholder who owns 5% or more of that corporation’s value. That 5% floor is notably lower than the 50% threshold used in the general attribution rules of Section 318, and it sweeps more shareholders into the analysis than most owners expect.
What Changes Once You’re a Controlled Group
Once aggregation applies, every employee across every entity counts as an employee of a single employer for the tests and limits below.
Coverage and Nondiscrimination
Qualified retirement plans must generally cover at least 70% of the employer’s non-highly compensated employees under the ratio percentage test of Section 410(b).{4Internal Revenue Service. Treatment of Otherwise Excludable Employees for Coverage and ADP Testing With a controlled group, the denominator includes every eligible non-highly compensated employee across all entities, not just those employed by the plan sponsor. A ten-person consulting firm with a generous profit-sharing plan cannot ignore the 200 employees at a related staffing company.
For 401(k) plans, the Actual Deferral Percentage and Actual Contribution Percentage tests must aggregate deferrals and contributions across all eligible employees in the group. Low participation among rank-and-file workers at one entity can drag the average down and limit how much the highly compensated employees at another entity are allowed to defer.
Compensation and Contribution Limits
The annual compensation limit for calculating plan contributions applies across the controlled group, not per entity. For 2026 that limit is $360,000.{5Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions An employee earning $200,000 from one entity and $250,000 from another in the same group counts only $360,000 of the $450,000 total.
The Section 415(c) annual addition limit, which caps combined employer and employee contributions to a defined contribution plan at $72,000 for 2026, also applies once across all plans maintained by every group member.{5Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions An owner participating in plans at two related companies cannot receive $72,000 in each. One boundary worth flagging: while the entities count as a single employer for qualification and nondiscrimination testing, each entity generally claims its own deduction for retirement plan contributions on its own tax return. The single-employer rule governs testing, not deduction mechanics.
Cafeteria Plans and Fringe Benefits
Section 125 cafeteria plans, which let employees pay for health insurance and other benefits with pre-tax dollars, must satisfy their own nondiscrimination rules on a controlled-group-wide basis. If one entity offers a cafeteria plan and another does not, all employees across both are counted when testing whether the plan disproportionately benefits highly compensated employees. Fringe benefits like qualified employee discounts follow the same logic.
ACA Employer Mandate
Controlled group status also drives Applicable Large Employer status under the Affordable Care Act. A group is an ALE when the combined workforce averages at least 50 full-time employees, including full-time equivalents, during the prior calendar year.{6Internal Revenue Service. Affordable Care Act Tax Provisions for Employers Cross that line and every entity in the group is individually subject to the employer shared responsibility provisions, including an entity with only five employees. Each member then has its own obligation to offer minimum essential coverage to its full-time employees.
What Happens After a Merger or Sale
Ownership changes create or dissolve controlled group relationships overnight. A plan that passed coverage testing last year can fail immediately after an acquisition adds hundreds of uncovered employees to the group.
Section 410(b)(6)(C) provides a transition period to prevent instant failure. If the plan satisfied the coverage requirements immediately before the change, and coverage is not significantly altered during the transition, the plan is treated as still meeting the coverage rules. The transition period runs from the date of the ownership change through the last day of the first plan year beginning after that date.{7Legal Information Institute. 26 U.S. Code 410(b)(6) – Transition Period For a calendar-year plan that acquires a new entity in June 2026, the transition extends through December 31, 2027. Amending the plan during the transition can end the safe harbor early, so benefit changes need caution while the rule is being relied on.
What It Costs to Miss It
Missing a controlled group relationship is one of the most common and expensive retirement plan errors. The correction path depends on when the problem surfaces.
- Caught within 9½ months after the plan year: the employer can self-correct by retroactively expanding eligibility and making qualified nonelective contributions for employees who should have been covered. Missed matching or profit-sharing amounts must also be funded.
- Caught later but before an audit: correction requires a formal submission to the IRS through the Voluntary Correction Program, including a compliance fee and documentation of corrective actions.
- Caught during an IRS audit: the employer must resolve the failure under the Audit Closing Agreement Program, which carries higher costs and real risk of plan disqualification.
Disqualification is the worst outcome. It retroactively strips the plan’s tax-favored status: employer contributions stop being deductible, employee deferrals become currently taxable, and the trust loses its tax-exempt status. For a plan with hundreds of participants, the damage compounds fast. The correction programs exist because those consequences are so severe, and they only work for sponsors who come forward before the auditor arrives.